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In July last year, just as many others fearing the pandemic, Ashish (35), bought a term life insurance policy at ?300 per month with a cover amount of ?50 lakh to protect the financial future of his dependants that included his wife and two children. However, within a few days, he realised that while deciding on the cover amount, he did not take into consideration the home loan of ?50 lakh he had to repay.
Fortunately, he got the cover amount enhanced to ?1 crore as his insurer provided a grace period of 30 days to make changes in the policy. Had Ashish not enhanced the coverage amount, his family would have not been able to meet even half of the expenses upon his demise.
Similarly, four years ago, Bengaluru resident Nishant (45) bought a term life insurance with a ?2 crore cover for future financial protection of his family that included his 42-year-old wife and two children aged 19 and 17.
While buying the policy, Mr. Nishant had chosen the right life cover , but did not think through as to how his family would manage the corpus of ?2 crore upon his demise. Unfortunately, Mr. Nishant passed away due to a terminal illness last year and his family received ?2 crore from the insurance company. On the advice of near and dear ones, his wife invested the entire amount in a shopping complex, which was coming up nearby, but is nowhere near completion now. She is stuck in a limbo on the expenses that are to come up in the next two months for the children — post graduation in the U.S.
Remember core goal
In both scenarios, the core objective of a term life insurance plan — financial protection of the dependants in case of the sudden demise of the breadwinner — could have been better served. While the intent of buying the term life insurance was right, the decision had been taken without evaluating and comparing certain important aspects.
While planning to buy a term life insurance plan, it is important that you do two things — one is to review and calculate the financial needs of your family in the coming years; and second, to compare the plan that you opt for with those available in the market, to choose the most suitable one.
For the first, consider the financial needs of your family and the life cover that you need. Your financial status today may not be the same tomorrow, it will only increase with time. Similarly, the expenses of your family are sure to rise in the years to come. When deciding on the cover amount, there are a few things that must be considered including the current family expenses, liabilities such as home or car loan, one-time expenses like children’s education and marriage, and retirement planning of the spouse.
Part lump sum options
For the second, select the best plan from those available in the market. For example, Mr. Nishant’s family would have been in a better position had he compared and chosen a plan that had terminal illness benefit, wherein Mr. Nishant could have received the ?2 crore death cover months before his death.
He could have allocated the money for the right financial instruments had he chosen a plan that gave a part of the claim payout as a lump sum and a part in monthly instalments. Terminal illness is defined by a few plans as an illness that would lead to death in the next six months and a terminal illness benefit in a term plan pays out the life cover amount before the demise. Similarly, there are plans where you can choose whether the family should be given ‘a lump sum ?2 crore on death’ or ‘?50 lakh on death and ?15 lakh every year for the next 15 years’.
Another important aspect that demands your due consideration while buying a term life insurance plan is coverage tenure — the number of years you want your policy to protect you. Ideally, you must buy a term plan by factoring in the earning capacity or retirement age. This is since you would have taken care of your children’s education or marriage, and post-retirement planning by then. The other aspect is the coverages your plan provides, such as terminal illness and waiver of premium in case of disability.
One of the strong pillars of comprehensive financial planning is protecting the future of your dependants through a term life insurance policy. In the past few months, there has been an increase in the sale of term plans across all customer segments. It is true that theCOVID-19 pandemic has reinforced the importance of financial protection in the minds of consumers in a way like never before. While it is good that more and more people are rushing towards buying term plans to provide financial protection to their dependants, it is equally important to buy the right product after comparing the various plans available, especially amid growing concerns around the second wave of the pandemic which is considered more dangerous than the first wave.
(The writer is Business Head — Term Life Insurance, PolicyBazaar.com)
07 May, 2021